Difference between opex and capex

Opex vs capex (comparison)

Opex, also known as operating expenditure, refers to day-to-day business spending. Capex, or capital expenditure, refers to investments in assets.

Businesses distinguish between opex and capex so that they can have a clearer picture of what they spend to run the business vs what they spend to equip the business. Different tax rules may apply to these two types of expenses, so making a distinction is also critical to paying the right amount of taxes.

Opex meaning

Opex is short for operating expenses (or expenditure) and it includes day-to-day business expenses. For example, rent, utilities, and salaries are opex because they’re short-term expenses that keep the business operating. Opex are often recurring and relatively steady for most small businesses. Opex doesn’t include the cost of goods sold (COGS).

Opex examples include:

  • Wages and salaries of employees
  • Sales general and administration, which are not connected with the product itself. Examples are things like marketing costs, insurance and consultant fees
  • Depreciation, which is the cost associated with your business assets (like work tools) getting older and losing value over time

Opex is reflected on the profit and loss statement and the cash flow statement, under ‘Cash flow from operations’.

Capex meaning

Capex is short for capital expenses (or expenditure) and it includes investments in business infrastructure. Examples include buying machinery, property, buildings, work tools, and sometimes even whole other businesses (in the case of acquisitions).

Capex is divided into two categories:

  • Maintenance capex are investments made to maintain current business performance. It includes things like replacing broken equipment.
  • Growth capex are investments made to improve the business or help it grow. An example is investing in additional equipment or buying land for building a new plant. It‘s a discretionary expense.

Capex is reflected in the cash flow statement, under ‘Cash flow from investments’. The assets bought will also be recorded on the balance sheet.

Difference between opex and capex

Opex and capex are similar because they both represent money going out of the business but there are important differences. Check out the key features of opex vs capex.

Opex is short term, Capex is long term

Operating expenses are short term costs. Opex is spent on things you’ll use within a year. Capital expenses are long term costs. Capex buys assets that will be around for longer than a year. For that reason, it can be faster to fix an opex mistake. If you spend too much on electricity one month, you can generally make adjustments the next month. However, the effects of a poor capex investment will generally be felt for longer.

Opex affects profits while Capex doesn’t

Opex is the cost of running the business and is subtracted from revenue when working out profit. The higher your opex, the more revenue you need to turn a profit. Capex are longer term investments intended to make the business better. They’re recorded on the balance sheet and aren’t considered part of the profitability equation.

Capex is more likely to be discretionary

Business will grind to a halt if you’re not paying your running costs (opex). However capital expenses can often be delayed if they need to be. There are exceptions, of course. If equipment fails, you may have to make a capex investment to replace it right away. But generally you’ll have some flexibility about when to make investments.

Opex tends to be stable, while Capex may be more sporadic

Operating expenses like rent, utilities, and wages may go up and down from month to month but they tend to follow a predictable pattern. For many small businesses, capex investments get made when money or opportunity arises, or when equipment fails. As a result, they tend to be uneven.

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Disclaimer

This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.